The impact of China's entry into WTO on agriculture poses the biggest current threat to the government. Official estimates suggest that cuts in import tariffs and lower subsidies on exports will lead to the loss of 13 million jobs among those who grow wheat, cotton and rice, because they will be unable to compete with cheaper imports. Worst-hit will be those areas where peasants tend tiny plots of poor land far from the main urban centres. About 120 million people live below the poverty line in these areas, and the gap between rural and urban incomes is larger than any time since the 1949 revolution. Riots and demonstrations are widespread. 'China can never compete with the United States, Canada and Australia in the farm arena,' said the China International Capital Corporation. 'China can never modernise its economy without drastic changes in population structure.' It said that it would be a tremendous task to create jobs for and retrain the millions of people who will be displaced, especially as the welfare system does not cover farmers. 'One of our major concerns regarding China's WTO membership is how to preserve social stability under high unemployment in the transition period.' The plight of impoverished farmers has worsened since 1996, with prices of farm goods declining and the growth in their incomes falling each year. The average farm income last year was 1,640 yuan, (HK$1,525) an increase of two per cent over 1999, while the average urban income rose seven per cent to 6,280 yuan. Grain stocks are at record levels and more than 100 million rural residents have no work. The official media regularly carry reports of illegal taxes and levies on farmers, and the consequent unrest. In a report earlier this year on the impact of WTO accession, the World Bank said that, after about five years from entry, the profitability of grain production, especially wheat and corn would decline, cutting grain output, the incomes of grain farmers and employment. 'Over a 10-year projection horizon, there will be a dramatic increase in grain imports, with rice being the exception, given its competitiveness in international markets,' it said. The challenge for the authorities will be how to manage this transition, to contain the social unrest and find new employment for those who leave the land. 'If the rural crisis boils over into widespread unrest, it would slow the full range of economic reforms,' says Andy Rothman, China strategist at CLSA Emerging Markets. 'Urban lay-offs would be reduced, financial sector reforms delayed and government intervention in the market-place increased.' Chen Xiwen, deputy director of the State Council Development Research Centre and one of China's top rural specialists, says that the only solution is to allow large-scale migration of rural people into urban areas. He says that improper policies of purchasing farm goods by local governments, an inadequate banking system, taxes and levies on farmers, an unsuitable rural research system and inadequate market information were blocking the growth of farmers' incomes. 'The numbers of farmers must be reduced to effectively enrich farmers. It will be extraordinarily difficult to develop the agricultural industry and rural areas without accelerating urbanisation. Therefore taking the initiative to promote urbanisation and moving surplus rural labour to towns and cities is crucial to the resolution of the contradictions in rural areas and increasing farmers' incomes,' he says. But WTO entry is not bad news for all farmers. Those who grow products in which China is internationally competitive, such as flowers, fruit and vegetables, will prosper. 'We are not competitive in land-intensive products but in labour-intensive ones like poultry, seafood, fruit and flowers,' says Mr Chen. 'After WTO entry, our food exports will reach US$12 billion to US$13 billion, with a surplus of US$6 billion to US$7 billion.' It is also good news for foreign exporters of farm goods, especially the United States and European Union, which expect higher sales of grain, fruit, wines and high-quality foods, thanks to the lower tariffs and elimination of trade barriers. Beijing has agreed to let foreign firms export and distribute farm products without going through state-trading firms or middlemen, and to eliminate sanitary barriers that are not based on scientific evidence, further opening the door to imports. The World Bank says that over the long term, the changes will benefit China. 'There is likely to be a more pronounced decline in the production of land-intensive sectors, such as grains and cotton, and an increase in the production of more labour-intensive sectors, such as livestock, fruit, flowers and vegetables. 'Liberalisation of global agricultural barriers should augment this trend, as it provides China with increased access to other countries' market in return for its remarkably large concessions,' it says. Only time will tell if the government can manage these changes, economically correct as they may be, without provoking social disorder that would derail them.